Exide Industries BUY. Auto Components February 03, Volume Recovery & Cost Saving to Cushion Margins RESULT UPDATE

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1 Feb-14 Mar-14 Apr-14 Jun-14 Jul-14 Aug-14 Oct-14 Nov-14 Dec-14 Jan-15 Institutional Equities India Research Auto Components February 03, 2015 RESULT UPDATE Bloomberg: EXID IN Reuters: EXID.BO BUY Volume Recovery & Cost Saving to Cushion Margins (Exide) delivered subdued performance in Q3FY15 with lower than expected revenues and net profit. Its Revenue/EBIDTA/PAT grew 19.5%/26.4%/25% YoY, but declined 11.6%/13.2%/22.7% QoQ to Rs 15.6bn/1.8bn/0.97bn (our estimate of Rs 16.5bn/2.1bn/1.26bn) respectively. Company s EBIDTA margins expanded 63 bps YoY, but contracted 22bps QoQ to 11.6%, as against our est of 12.7%, due to lower volume and lag effect of benefit from falling raw material prices. OEM margins are still under pressure and have negative impact on overall profitability. On the other hand, higher inverter sale (50% YoY growth) was the main driving factor for volumes and revenues. Higher tax rate and lower non operating income also pulled down net profit to some extent. Revival in Automotive Segment & Cost Cutting Efforts to Improve Margins: Exide s Q3FY15 margins were largely flat QoQ, despite double digit QoQ fall in volumes and revenues is commendable. We expect strong revival in automobile sales in FY16 with beginning of CV up-cycle and economic recovery. We believe that with improving sentiments and better OEM sales, Exide would regain pricing power across segments. Moreover, we expect improvement in replacement segment, due to stretched replacement cycle. Therefore, higher automotive volumes with better pricing and company s cost cutting initiative would translate into EBIDTA margin improvement of 160 bps over FY14-FY17E. We also expect margin improvement due to with higher utilization. Recommendation CMP: Target Price: Previous Target Price: Rs195 Rs230 Rs215 Upside (%) 18% Stock Information Market Cap. (Rs bn / US$ mn) 165/2, week High/Low (Rs) 205/100 3m ADV Rs486 mn/ US$8.7mn Beta 0.9 Sensex/ Nifty 29,682/8,952 Share outstanding (mn) 850 Stock Performance (%) 1M 3M 12M YTD Absolute Rel. to Sensex Performance 31,500 29,500 27,500 25,500 23,500 21,500 19,500 17,500 15, Outlook & Valuation To factor in lower Q3FY15 performance, we lower our estimates for FY15, while factoring revival over FY16-FY17, we increase our volume & revenue estimates by 1%/4% for FY16E/FY17E. Raising our margin estimates, we increase our EPS estimate by 3%/7.4% for FY16E/FY17E. Accordingly, we increase our target price from Rs 215 to Rs 230 per share, valuing Exide s core battery business at Rs.200 per share at 17x FY17E EPS and its insurance business at Rs.30 per share (1.7xP/B). In view of expected margin improvement from current level and attractive valuation of 14xFY17E EPS, we reiterate our BUY recommendation on Exide. Key Financials Net Sales 60,714 59,642 70,842 85, ,012 EBITDA 7,860 8,171 9,297 12,525 15,638 EBITDA margin (%) Adj. Net Profit 5,228 4,867 5,618 7,899 10,004 EPS (Rs.) YoY growth (%) ROE (%) ROCE (%) PER (x) EV/ EBITDA Source: Company, Karvy Institutional Research; *For valuation, we have excluded Rs 30 for insurance business from CMP. Sensex (LHS) Source: Bloomberg, Karvy Institutional Research Earning Revision (%) FY15E FY16E FY17E Revenue EBITDA EPS Source: Karvy Institutional Research Analyst Contact Mitul Shah mitul.shah@karvy.com Exide Inds. (RHS)

2 Exhibit 1: P&L Review YE March (Rs. mn) Q3 FY15 Q3 FY14 YoY (%) Q2 FY15 QoQ (%) 9MFY15 9MFY14 YoY (%) Total Revenue 15,587 13, , ,326 43, Less: Net Raw Material consumed 10,448 8, , ,950 28, Mfg & Sales Exp. 2,317 2, , ,500 6, Personnel 1, , ,103 2, Total Expenditure 13,785 11, , ,553 37, EBIDTA 1,802 1, , ,773 6, Less: Depreciation , EBIT 1,450 1, , ,768 5, Less: Interest Add: Other income Less: Extraordinary Expense (net) 0 0 NM 0 NM NM Profit Before Tax 1,455 1, , ,940 5, Less: Total Tax ,858 1, Profit After Tax , ,083 3, Profit After Tax Excl. extra-ordinaries , ,071 3, Reported EPS (Rs.) Adj. EPS (Rs.) Margin Analysis (%) Change In BPS Change In BPS Change In BPS EBIDTA Margin Adj. NPM Effective Tax Rate Cost Analysis RM/Net Sales Adv.& Sales Promotion Expenses./Net Sales Personnel/Net Sales Source: Company, Karvy Institutional Research, NA-Not Applicable. Exhibit 2: Estimate Revision Y/E March (Rs. mn) New FY15E FY16E FY17E Old % change New Old % change New Old % change Net revenues 70,842 71,794 (1.3) 85,010 83, ,012 98, EBIDTA 9,297 9,779 (4.9) 12,525 12, ,638 14, EBIDTA Margin(%) (50) Adj. Net Profit 5,708 6,135 (7.0) 7,899 7, ,350 9,350 - EPS (Rs.) (7.0) Source: Company, Karvy Institutional Research To factor in lower than expected volumes, we lower our volume, revenue and earnings estimates by 1%/1%/5% for FY15E. However, in view of CV cycle recovery over FY16-FY17, benefit of lower lead price with lag effect and control on advertising expense, we increase our estimates for FY16E/FY17E in the range of 3-7%. 2

3 Conference Call Key Takeaways Industrial Segment Grows by 35%: According to management, Exide s Industrial segment comprising invertors, UPS etc grew by 35% YoY, contributing 47% of the Company s revenues in Q3FY15. Primarily growth came from invertor segment, which grew by 50% YoY during the quarter. Company s inverter segment was benefitted by monsoon deficit and lower base of last year, while further monsoon deficit would act as a positive trigger for the Company in coming months. Automobile Segment Replacement Grows by 15-20%, OEM Remains Flat: Revenues from Automobile OEM segment remained flat in four wheeler as well as two wheelers. However, in replacement auto segment, it grew by 20% YoY in four wheeler and 15% YoY in two wheeler segment in Q3FY15. For four wheelers, Replacement:OEM ratios was 65:35 and for two wheelers, it was 34:66 in volume terms during the quarter. Going forward, company expects improvement in OEM sales, while replacement demand would pick up in FY16. Improving Utilisation but No Pricing Action: Exide s utilization during the quarter was highest over past two years with utilization of industrial segment was ~92%, two wheeler utilization was ~83% and four wheeler utilization was 79% in Q3FY15. On account of lower lead prices, there was no price hike during the quarter, while company absorbed 2% excise hike, compensated by lower raw material price since beginning of January Diesel price cut would provide additional relief to company going forward. New Product Launch, aided by Technology Upgradation: Exide plans to spend Rs 5.5 bn capex over next 2 years, out of which Rs 4 bn is allocated for Automobile segment, while balance Rs 1.5 bn in allocated for its Industrial segment. Within Automotive segment Rs 2 bn would be spend on technology upgradation with help of tie up with 3 global technology partners. This would help company to launch new products in automobile battery segments and may lower overall cost going forward. Management cited capex of Rs 4 bn in FY15, out of this around Rs 2.2 bn is spent in 9MFY15. Company also invested Rs 1.5 bn in its insurance subsidiary for its business expansion during Q2FY15, while further investment in insurance business is not needed at present. We value Exide s core battery business at Rs.200 per share, valuing it at a P/E multiple of 17xFY17E EPS. We value Exide s insurance business at Rs.30 per share, based on its P/B of 1.7x. Exhibit 3: SOTP Valuation Business Multiple value per share Core battery business 17x FY17E EPS 200 Insurance business 1.7xP/B of FY14 30 Total 230 Source: Company, Karvy Institutional Research 3

4 Exhibit 4: Profit & Loss Statement Net revenues 60,714 59,642 70,842 85, ,012 Operating expenses 52,854 51,471 61,545 72,485 86,374 EBIDTA 7,860 8,171 9,297 12,525 15,638 EBIDTA margin (%) Other income Interest Depreciation 1,135 1,256 1,363 1,545 1,692 Profit Before Tax 7,423 7,233 8,183 11,366 14,395 Tax 2,195 2,360 2,475 3,467 4,390 Reported Net Profit 5,228 4,873 5,708 7,899 10,004 Net Margin (%) Adjusted Net Profit 5,228 4,867 5,618 7,899 10,004 Exhibit 5: Balance Sheet Equity capital Reserves & surplus 33,386 36,465 40,687 47,101 55,621 Shareholders funds 34,236 37,315 41,537 47,951 56,471 Total Loans Deferred tax liability 977 1,051 1,051 1,051 1,051 Total Liabilities and Equity 35,212 38,365 42,588 49,002 57,521 Gross block 19,002 20,145 22,054 24,404 27,254 Depreciation 9,058 10,164 11,527 13,072 14,764 Net block 9,944 9,980 10,527 11,332 12,490 Capital WIP Investments 16,401 19,670 22,858 26,049 30,846 Inventory 11,671 11,856 14,164 16,682 19,878 Debtors 5,092 5,166 5,432 6,521 7,826 Cash & Bank Bal 748 1,200 1,373 2,395 2,946 Loans & Advances 1,025 1,173 1,416 1,700 2,040 Current Assets 18,536 19,394 22,384 27,298 32,690 Sundry Creditors 5,641 6,567 7,756 9,135 10,886 Other Current Liability 4,630 4,634 6,037 7,304 8,531 Current Liability& Provisions 10,271 11,201 13,793 16,439 19,416 Net current assets 8,265 8,193 8,591 10,859 13,274 Total Assets 35,212 38,365 42,588 49,002 57,521 4

5 Exhibit 6: Cash Flow EBIT 6,725 6,915 7,933 10,980 13,946 Other Income Depreciation & Amortisation 1,135 1,256 1,363 1,545 1,692 Interest paid(-) (42) (12) (22) (30) (35) Dividends paid(-) (1,555) (1,782) (1,485) (1,485) (1,485) Tax paid(-) (2,195) (2,360) (2,475) (3,467) (4,390) Operating Cash Flow 4,807 4,347 5,586 7,959 10,211 Change in Working Capital (2,183) 523 (225) (1,246) (1,863) Cash flow from Operations 2,625 4,870 5,361 6,713 8,348 Capex (1,740) (1,212) (2,000) (2,500) (3,000) Strategic Investment (5,500) (1,352) (1,560) (343) (525) Non Strategic Investment 4,645 (1,917) (1,627) (2,848) (4,272) Cash flow from Investing (2,595) (4,481) (5,188) (5,691) (7,797) Equity Issue/Others Cashflow from Financial Activities Change in Cash , Opening cash ,200 1,373 2,395 Closing cash 748 1,200 1,373 2,395 2,946 Exhibit 7: Key Ratios Y/E March FY13 FY14 FY15E FY16E FY17E Revenue Growth EBITDA Margin Net Profit Margin ROCE (%) ROE (%) Exhibit 8: Valuation Parameter Y/E March FY13 FY14 FY15E FY16E FY17E EPS( Rs) P/E (x) P/ BV (x) EV/ EBITDA (x) Fixed Assets Turnover Ratio (x) Debt / Equity (x) EV/ Sales (x) Source: Company, Karvy Institutional Research; *For valuation, we have excluded Rs 30 for insurance business from CMP. 5

6 Stock Ratings Absolute Returns Buy : > 15% Hold : 5-15% Sell : < 5% For further enquiries please contact: research@karvy.com Tel: Disclosures Appendix Analyst certification The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Disclaimer The information and views presented in this report are prepared by Karvy Stock Broking Limited. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor Karvy Stock Broking nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to time. Every employee of Karvy and its associate companies are required to disclose their individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Stock Broking Ltd. This report is intended for a restricted audience and we are not soliciting any action based on it. Neither the information nor any opinion expressed herein constitutes an offer or an invitation to make an offer, to buy or sell any securities, or any options, futures nor other derivatives related to such securities. Karvy Stock Broking Limited Office No. 701, 7 th Floor, Hallmark Business Plaza, Opp.-Gurunanak Hospital, Mumbai Regd Off : 46, Road No 4, Street No 1, Banjara Hills, Hyderabad Karvy Stock Broking Research is also available on: Bloomberg - KRVY <GO>, Thomson Publisher & Reuters. 6